Medical bills are different—they can cause serious and long-term financial problems.
If you make a credit card purchase, you know how much you've spent and what the interest rate will be if you don't pay the balance in full.
Get sick and end up in the hospital, and you won't find out the cost until after the treatment is performed. The billing process is complicated, insurance may not cover everything and you might not have the money to pay all of those unexpected bills.
If this medical debt goes to collections and shows up on your credit report, it will hurt your credit score. And that makes sense, since lenders use that score to predict if a potential borrower is likely to pay back their debt.
But are the computer models being used to create these three-digit credit scores properly evaluating medical debt when predicting creditworthiness?
New research from the Consumer Financial Protection Bureau (CFPB) concludes that they are not—the scoring models could be more precise.
The agency studied five million credit records from September 2011 and September 2013 to determine how well credit scores predict someone's likelihood of paying back their debt.
By looking at how people really paid their bills during this two-year period, the CFPB found that the computer models used to create credit scores may overly penalize consumers with medical collections:
- Credit scores may underestimate creditworthiness for someone with unpaid medical debt that goes into collection by 10 points. In other words, someone with medical debt generally paid back their loans or bills on par with someone who had a credit score about 10 points higher.
- Credit scores may underestimate the creditworthiness of someone who repays their medical debt that has gone to collections by up to 22 points.
"This tells us that having a medical debt in collections is less relevant to a consumer's creditworthiness than having an unpaid cell phone bill or overdue rent," said CFPB director Richard Cordray. "Treating medical and non-medical debt identically lowers some consumers' scores by more than is warranted given their observed likelihood of repaying loans. In short, credit scores could be more predictive if they treat medical debt and non-medical debt differently."
And while 10 to 20 points may not seem like a lot, for some people that could make it impossible to get a credit card, car loan or mortgage—or drive up the interest rate dramatically if they do qualify.